Wall Street Journal calls out Wall Street
Because it's a serious newspaper committed to objective news gathering, the Wall Street Journal can't come right out and say that the arguments derivatives-dealers are using to fight transparency are total bunk. But they can come pretty close:
Proponents say increased transparency into derivatives, which are mostly traded in the over-the-counter market, would make it easier for investors to find out what the rest of the market is doing, giving them the ability to find the cheapest price.
Today, prices for only a small portion of the derivatives market are accessible to investors, who often need to make phone calls to dealers to find out the going rate for the contracts.
The price-reporting model would be akin to Trace, a vehicle for corporate-bond trading implemented in 2002. After Trace was introduced, the gap between bid and offer prices was cut in half, hurting trading profits for banks.
Many bankers argue that the transparency provided by Trace, which reports prices several minutes after a trade is completed, hurt liquidity in the corporate-bond market because traders were less willing to take big positions. Academic research, however, has shown that there's little evidence that Trace hurt liquidity.
Since the banks stand between investors in the deals, they are often able to make a big profit on the difference between the prices at which investors are willing to buy and sell. If investors have better information about how the deals are priced, the "spread" between those prices should shrink, hurting the banks' profits on the deals.
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